As part of an aggressive effort to combat high inflation, the Fed may raise interest rates by 0.75 percentage point later this month.
The July 26-27 meeting left the door open for a full-point increase. In recent interviews and public comments before their premeeting quiet period, some of them dismissed the idea.
As they raise rates at a historically fast pace, some officials point to softening economic activity.
Before last week, officials signaled a 0.75-point increase this month. After Wednesday’s soaring inflation report, they said they’d consider a full-point hike.
The consumer-price index rose 9.1% in June from a year earlier, a new four-decade high, and showed broadening inflation pressures.
Last year’s economic reopening and government stimulus boosted demand. Russia’s war against Ukraine exacerbated supply-chain disruptions and boosted energy and commodity prices.
Fed officials have raised interest rates at their last three meetings, starting in March. They rose 0.5 points in May and 0.75 points in June, the most since 1994. The Fed hasn’t raised rates by a full percentage point since the early 1990s.
Atlanta Fed President Raphael Bostic said raising rates too dramatically could weaken the economy.
Other Fed officials are uneasy about recent rate hikes. Kansas City President Esther George said last week that a rapid rate increase risks tightening policy faster than the economy and markets can adjust.
Since the Fed’s 0.75-point rate hike last month, investors have shown growing recession fears. Oil prices and bond yields have fallen.
A University of Michigan survey of consumers’ long-term inflation expectations fell to its lowest level in a year, weakening the case for a 1-percentage-point rate hike. Fed officials monitor household and business inflation expectations because they can self-fulfill.
Since Russian President Vladimir Putin’s invasion of Ukraine in late February, market-based measures of future inflation have also fallen.
Laurence Meyer, a former Fed governor, said that’s comforting. “This takes the pressure off of them. I don’t think they want to go 100.”
After last Wednesday’s inflation report, investors and some analysts expected a one-percentage-point rate hike at the July meeting, with interest-rate futures contracts implying an 80% probability later that day, according to CME Group.
Waller said Thursday that markets may be overvalued. Friday’s implied probability was less than 30%.
Wells Fargo’s chief economist called for a larger rate hike last week. Friday, he said the case had weakened.
A full percentage point rate hike could complicate future policy explanations. “If you do 100, have a good story.” LH Meyer’s Mr. Meyer says they don’t have one. Officials must explain what prompted a shift and why they’ll maintain an aggressive pace.
A 0.75-point rate hike could signal officials’ ability to maintain a historically aggressive pace if demand and inflation remain high or to moderate increases if inflation and economic activity slow.
Officials could face more difficult decisions later this year about how high to push rates, especially if the economy slows but inflation remains above the Fed’s 2 percent target.
Richmond Fed President Tom Barkin said last week he wants to raise rates above investors’ inflation expectations in two years. Any 25-basis-point change isn’t as important as the destination, he said.
Stronger-than-expected inflation could change that, prompting faster and higher rate hikes. James Bullard, president of the St. Louis Fed, said Friday he expects to raise the fed-funds rate to just below 4% by December.
With another 0.75-point rate hike at the next meeting, the Fed will have raised the fed-funds rate as much as between 2015 and 2018. It would raise the rate to between 2.25 and 2.5 percent, closer to a neutral rate that neither stimulates nor restricts demand.
Wall Street Journal economists put the chance of a recession in the next year at 49%. Most of the 62 respondents expect the Fed to raise the fed-funds rate above 3.25 percent by the end of the year and keep it there next year. Most expect a Fed rate cut by 2023.
Fed Chairman Jerome Powell has said it will be harder to reduce inflation without a recession if energy prices rise or supply-chain bottlenecks don’t improve. Officials should slow growth enough to cool price pressures without causing a recession.
Read the full story from The Wall Street Journal.